Bitcoin’s emerging digital margin trading fell short of its promise of calm this week.
This week, Strategy’s STRC preferred stock fell to $82.50 before rebounding, while Strive’s SATA fell from near parity to the low $90s, but also recovered. Both products were sold to the market as income products built around Bitcoin treasury companies and were intended to have double-digit dividends and a pull towards $100.
The breakout shocked a market that grew to about $10 billion in less than a year. Investors also got a first look at how these Bitcoin-linked yield products behave when margins are squeezed by quiet trading.
Quiet revenue transactions attract debt
STRC and SATA represent a new corner of the Bitcoin treasury market. These products are typically structured as perpetual preferred stock that pays periodic dividends but has no set maturity date.
Strategy, the largest public Bitcoin holder, contributed to the creation of this category by STRC. Strive was followed by SATA. Both issuers used the product to reach investors looking for yield from their Bitcoin-centric balance sheets, rather than direct coin exposure.
The product found demand because Bitcoin itself does not generate income. Preferred stocks that pay around 11% to 13% can be attractive to investors who want a stream of dividends and believe the issuer’s Bitcoin reserves provide long-term balance sheet strength.
The trade became more attractive as STC remained near $100. Securities that pay double-digit dividends but rarely stray far from parity encourage investors to treat them as stable income products.
But some buyers went further. They borrowed against equity to increase exposure and increase returns. Dividends remained the same, but leverage allowed investors to own more shares with less initial capital.
This deal required one condition. That meant the preferred stock needed to be maintained at approximately par value.
Once STRC started slipping, leveraged holders lost their cushion. Stock prices fell, margin pressure mounted, and accounts that had borrowed against positions faced forced sales.
Liquidations are concentrated near the low price
Parker White, co-founder of DeFi Development Corp., explained in a social media post that STRC’s recent drop to $82 is indicative of a forced liquidation event.
He said many buyers were entering the trade around $100, and STRC was spending a lot of time there. If these investors used similar intermediary margin conditions, their risk levels would also approach similar prices.
White said STRC’s move to the low $80s may have pushed some accounts over the maintenance margin threshold. Once these levels are reached, the broker may force a sale regardless of whether the investor still believes in the product.
When the volume was added to that view. White said the heavy intraday trading during the decline appears to be consistent with broker-driven liquidations rather than regular position changes.
In traditional stock markets, maximum volume is often seen near the opening and closing prices. A sharp sell-off during the day suggested that the account was being closed as the price breached the margin level.
Short sellers may have accelerated this move. Crowded long trades funded by borrowed money create obvious targets. Bearish traders could drive the price down, trigger a forced sale, and buy back shares as liquidation sales increase volume.
The decline of SATA was subject to similar pressures. Investors facing margin calls don’t necessarily sell just the position that caused the problem. They often sell what is available. This could lead to similar declines in related securities, especially in younger markets with overlapping investor groups.
This move did not require a default, missed dividend payments, or collapse of the issuer’s assets. It needed a security deemed stable enough to borrow against, and enough holders to flock to the same trade.
Strive says reserves haven’t been hit.
Strive CEO Matt Cole said the volatility was the most challenging day yet for digital credit given market conditions, but rejected the idea that the price movements reflected weakening issuers’ creditworthiness.
Cole said Strive’s dividend reserves remain intact and the company is well positioned to meet its obligations. He described the move as a leveraged liquidation rather than a deterioration in the underlying business.
According to him:
“When the market moves against leveraged holders, forced selling can cause a cascade. Prices fall, margin calls increase, further selling occurs, and the cycle continues on its own. Selling becomes decoupled from fundamentals and driven by balance sheet constraints.”
He added that the liquidation incident does not mean Strive has lost its ability to pay dividends.
Supporters of Strategy made similar arguments against STRC. Jesse Myers, head of Bitcoin strategy at The Smarter Web Company, said that Strategy’s balance sheet remains unchanged as STRC’s stock price has declined.
He said the company could continue paying dividends for decades under current conditions, and Bitcoin’s gradual rise would extend its runway.
Lower prices have also increased real yields for new buyers. Preferred stocks pay the same stated dividend regardless of where they are traded. Investors who buy at around $85 will receive a higher yield than those who buy at $100, as well as potential upside if the stock approaches par.
This allowed buyers to come back after the steepest sell-off. Both STRC and SATA have rebounded from their lows, suggesting some investors view the move as a forced sell rather than a permanent repricing of the issuer.
Next version of Bitcoin yield trading will cost even more
While STRC and SATA have recovered from their lows, the decline leaves less room for brokers, issuers, and investors to treat Bitcoin-related preferred stocks as quiet income products.
Brokers are likely to review their margin rules following the STRC drop, which showed how quickly forced selling can gather around a single level. Tighter requirements would make it harder for investors to build large borrowing positions, reducing the risk of another round of unwinding, but also making it less attractive to use equities to extend yields.
Publishers may also need to provide stronger protection. Larger cash reserves, clearer share buyback plans, higher call premiums, and more flexible dividend terms can help reassure buyers that companies have the tools to support their products in times of stress.
However, fixes are costly.
Higher dividends may bring STRC and SATA closer to parity levels, but they also make securities more expensive for the companies issuing them. Share buybacks can signal confidence, but they require cash or new financing. Larger reserves strengthen the structure, but may mean less money is available to buy Bitcoin.
Meanwhile, the selloff gave investors a clearer way to gauge risk, as it showed that preferred stocks tied to Bitcoin’s treasury companies can continue to pay dividends and still plummet in the market. Issuers can protect their balance sheets while leveraged holders are forced out. Even a product designed to smooth Bitcoin’s volatility can cause panic if too much borrowing piles up around it.
Cole said:
“While today’s events have been difficult for some investors, they have also been instructive. Digital credit is still in its infancy. It is better for the market to experience these dynamics now, and learn from them, while the market is relatively small, than to have the market many times larger in a few years. Investors, issuers, and market participants can all benefit from understanding the risks associated with leverage and liquidity before the asset class takes off.”
(Tag translation) Bitcoin
